Thursday June 1, 9:00 am Eastern Time
Individual Investor
Boyd Gaming: A Low Risk Bet
Senior Analyst: Glenn Curtis (06/01/00)
Over the past several years, gaming companies have been out of favor. Overcapacity, rising interest rates and competition have sent shares on a roller coaster ride, and it hasn't been pleasant.
But these concerns, while real, may be overblown. In the past six months, the sector has begun to show some life, and the industry may deserve a return to favor simply because so many companies are trading below the value of their assets. One company we think has not gotten its due is Boyd Gaming (NYSE: BYD - news), which owns and operates 11 gaming facilities in Nevada, Illinois, Indiana, Mississippi and Louisiana.
Certainly, the company's financial performance is sound. In the first quarter, it earned $0.22 per share, compared to $0.18 per share a year earlier. Earnings before interest, taxes, depreciation and amortization, or EBITDA, rose a healthy 16.5% to $63.7 million. More importantly, the company was able to kick off substantial operating cash flow in the quarter: Remember that casinos build value for shareholders by either buying back shares or reducing debt loads. With this cash flow, the company was able to reduce its existing debt by $111 million to $873 million.
Going forward, the company has several potential catalysts. In a partnership with Mirage Resorts (NYSE: MIR - news), the company is currently planning a $750 million facility in Atlantic City, New Jersey called the Borgata. With the pending acquisition of Mirage by MGM Grand (NYSE: MGG - news) the exact timing of the opening of this property is not as clear as it once was. However, the company is confident that by 2003 a facility should be up and running. This is important in that gaming companies must not only manage existing properties but keep the pipeline of potential properties filled. We feel that management is doing a good job of that.
It's also a good sign that the company has begun negotiating with the Narragansett tribe of Rhode Island on a proposed tribal casino in West Warwick. The outcome will depend on voters' response to a referendum this November. There are no guarantees, but the company says that if all goes well, a facility here could also be ready in 2003.
Sensing value, company chairman, William S. Boyd bought 100,000 shares in March at an average price of $5.03. Interestingly, other executives sold the stock last year at slightly higher prices. But we think that this purchase suggests that the stock has found a bottom. The fundamentals suggest that investors should give the company a greater degree of respect. When the trading window opens once again after the second quarter, we would not be surprised to see insiders continue to buy shares in the open market.
Fortunately, the bullish argument doesn't end there. Boyd bought the Blue Chip casino in Indiana back in November for $273.6 million, or only about 3.5 times trailing cash flow. That's cheap!
The property has already begun to bear fruit. Blue Chip reported operating cash flow of $20.9 million during the first quarter, up 27% over the same period last year. Based upon foot traffic and current win rates, we would expect a continued strong performance out of this property. On a year over year basis, the EBITDA contribution will prove to be a boon for shareholders.
Finally, the company is banking on the $90 million expansion of its Sam's Town casino outside Las Vegas. The company is adding a movie theater, parking, restaurants and floor space to the existing site. Sam's showed a healthy 10.5% jump in EBITDA during the first quarter. With these improvements we would expect continued improvements on the operating line going forward. To that end, the Street is looking for Boyd to earn $0.74 per share in 2000 and $0.82 per share in 2001.
This is a bargain in our book. But the company is not only cheap from an earnings standpoint. Consider that the company trades at a slight discount to its $5.21 per share book value. Just think if Boyd were to sell itself outright, or to sell of parts of the company, we think that the common shareholder would receive substantially more than the stock's Wednesday closing price of $4.94.
But what's the company really worth? Deutsche Banc Alex Brown analyst Robin Farley points out that Boyd only trades at 4.5 times forward cash flow whereas other small companies like Boyd trade for up to 5 or 6 times cash flow. We're going to go out on a limb and say that Boyd deserves a premium to these other companies and could be worth upwards of $10 per share. If gaming companies ever come fully back into favor, a price in the mid teens might be more indicative of the company's true worth.
Bottom Line:
As the Blue Chip acquisition continues to have a positive impact on the bottom line, and as the Sam's Town expansion yields greater foot traffic, we can't help but think that the common shareholder will be rewarded. |
